Almost half of all investors are selecting emerging market funds as a core holding in their ISA, according to the latest FE Trustnet poll.

Our research shows that 45 per cent of our readers have made higher risk, fast-growth regions such as China, India, Brazil and Russia the biggest overweight in their portfolios.

Meanwhile, only 37 per cent of investors are opting for a more traditional portfolio make-up with UK funds as the main focus.

The result is especially significant given that there are far fewer emerging market portfolios to choose from in the IMA unit trust and OEIC universe compared with UK equity funds.

According to FE data, there are 181 vehicles across the Asia Pacific ex Japan, Asia Pacific inc Japan, China/Greater China and Global Emerging Markets sectors, compared with 455 in the IMA UK All Companies, UK Equity Income and UK Smaller Companies sectors.

Industry professionals say that the high allocation to the developing world represents a steady evolution in the investment world and that emerging market regions are well on their way to becoming a mainstream asset class.

"In the past emerging market funds have only made up a small proportion of investors' portfolios because they were always deemed to be very high risk," said AWD Chase de Vere’s Patrick Connolly.

"However, that perception is now changing and investors are beginning to realise that investing in these regions can actually reduce risk in a portfolio because it diversifies your exposure away from UK-focused assets."

He added: "People have seen that emerging market regions have done very well in the past but after a poor year in 2011 they represent a very attractive buying opportunity versus other markets. The consensus is that developing economies are going to outstrip their developed counterparts for growth in 2012."

Data from FE Analytics shows that the average Global Emerging Markets fund lost 19 per cent in 2011 compared with a loss of less than 7 per cent from the MSCI All Country World index. So far in 2012, funds focused on developing regions have returned 11 per cent versus 8 per cent from the rest of the world.

Performance of sector vs index in 2011



Source: FE Analytics

Kerry Nelson, managing director of Nexus IFA, says that it is encouraging to see so many investors make the right asset allocation calls.

"It’s pleasantly surprising that such a high percentage of investors are recognising the potential of these markets," she commented. "In this sort of tough environment most people do exactly the wrong thing and go very cautious but now they are recognising that it is the right time to participate in emerging markets."

The soft-closure of some of the UK’s leading emerging market funds, including Aberdeen Emerging Markets and First State Greater China Growth, has created a vacuum in the space and many IFAs are in the process of researching viable alternatives.

Winterflood’s Simon Elliot told FE Trustnet last week that investment trusts such as Dr Mark Mobius’ Templeton Emerging Markets are likely to experience discount contractions when investors flood in from the over-subscribed open-ended market.

The poll also indicated that nearly one-fifth of investors – 18 per cent – were allocating predominantly to developed markets other than the UK, such as the US, Europe and Japan.

"I’ve noticed a lot more participation in the US than there has been over the last couple of years," said Nelson. "There is a little bit more stability following positive data and the US traditionally leads the world into a recovery phase."

"There has also been a case for investing in Japan but investors are still nervous as it has been so unpredictable in the past."